March 18, 2013 is a big day for the People of California: the Day of Debt.
There will be two votes at two meetings three hours apart to authorize the sale of the bulk of the $9.95 billion Prop 1A bonds. (Several hundred million were approved in 2010 and 2012, FYI.)
At 11:00, the California High-Speed Rail Authority will meet to authorize borrowing $8.6 billion through the sale of bonds authorized by 52.7% of California voters in November 2008 as Proposition 1A. Here is the meeting agenda:
At 2:00, the California High-Speed Passenger Train Finance Committee will meet at the same location to authorize borrowing $8.6 billion through the sale of bonds authorized by 52.7% of California voters in November 2008 as Proposition 1A. Here is the meeting agenda:
At these meetings, I will ask for amendments to the resolutions to prohibit the sale of 40-year bonds (this maturity term is allowed in statute, by the way, see California Streets and Highways Code Section 2704.11(b)) and prohibit the sale of Capital Appreciation Bonds. I’m also going to ask about what happens if the state sells the bonds and then the Authority loses the lawsuit alleging its failure to conform to the terms of Proposition 1A.
I also sent this message electronically to the California High-Speed Rail Authority (firstname.lastname@example.org) and the California High-Speed Passenger Train Finance Committee:
Dear California High-Speed Rail Authority leadership:
At your Monday, March 18, 2013 meeting, you will consider a resolution as part of the procedure to direct the state to borrow $8.6 billion for high-speed rail by selling bonds authorized under Proposition 1A (2008) to investors:
4. Consideration of request to the High-Speed Passenger Train Finance Committee to approve resolutions under the Safe, Reliable High-Speed Passenger Train Bond Act for the 21st Century, authorizing the issuance of bonds and commercial paper notes as follows: Resolution IX, authorizing the issuance of State of California High-Speed Passenger Train Bonds or Commercial Paper Notes in the principal amount not to exceed $8,599,715,000. ($8.6 billion)
I am requesting you to add language to these resolutions that does the following:
1. Prohibit these bonds from being sold with 40-year terms of maturity.
2. Prohibit these bonds from being sold as Capital Appreciation Bonds.
Assembly Bill 3034, enacted in 2008, authorized sale of the Proposition 1A bonds as 40-year bonds. The bill analysis for the July 7, 2008 Senate Appropriations Committee indicated that the maturity extension from a 30-year to a 40-year term would increase interest payments and increase the overall cost at an estimated amount of $3,777,000,000 ($3.7 billion) in 2008 dollars, assuming 5 percent interest and 3 percent inflation. (Source: http://www.leginfo.ca.gov/pub/07-08/bill/asm/ab_3001-3050/ab_3034_cfa_20080707_114445_sen_comm.html)
These estimates were produced at a time when the official cost was estimated at $45 billion. Now the figure of $68 billion is being officially cited. Why add another $3.7 billion to the cost?
Also, in the Official Voter Information Guide for the November 2008 election, the Legislative Analyst’s Office stated this about the cost of the proposed Proposition 1A bond sales authorized under the Safe, Reliable High-Speed Passenger Train Bond Act:
The costs of these bonds would depend on interest rates in effect at the time they are sold and the time period over which they are repaid. While the measure allows for bonds to be issued with a repayment period of up to 40 years, the state’s current practice is to issue bonds with a repayment period of up to 30 years. If the bonds are sold at an average interest rate of 5 percent, and assuming a repayment period of 30 years, the General Fund cost would be about $19.4 billion to pay off both principal ($9.95 billion) and interest ($9.5 billion). The average repayment for principal and interest would be about $647 million per year. (Source: http://voterguide.sos.ca.gov/past/2008/general/analysis/prop1a-analysis.htm)
The voter guide leaves the voter to assume that the state would maintain the current practice of selling 30-year bonds. It does not even mention the cost of 40-year bonds!
Regarding the Capital Appreciation Bonds, you are surely aware of the controversy surrounding California’s school districts selling these bonds for construction rather than the traditional type of general obligation bond (current interest bond). Please don’t hide the cost of this project by delaying repayment to investors with costly bonds that accumulate compound interest.
This project will assess huge debt burdens on future generations of Californians. Please avoid schemes that hide the cost from this generation.
Finally, at your March 18, 2013 meeting, please address what would happen if the state sells the Proposition 1A bonds and then the California High-Speed Rail Authority loses the court case John Tos v. California High Speed Rail Authority (Case No: 34-2011-00113919) (aka “the Kings County lawsuit”) regarding conformity to the provisions of Proposition 1A. A hearing in this case is scheduled for May 31, 2013 in Sacramento County Superior Court.Kevin Dayton President and CEO Labor Issues Solutions, LLC www.laborissuessolutions.com
We’ll see if the California High-Speed Rail Authority and the California High-Speed Passenger Train Finance Committee can explain their plans for borrowing money through bond sales in a simple, transparent manner at their meetings in Sacramento on Monday, March 18, 2013.